Presenting a live 90-minute webinar with interactive Q&A Hotel Management Agreements: Key Topics and New Frontiers Navigating Fees, Exclusivity, Approval Rights, Finance Provisions, Brand Management and More WEDNESDAY, JUNE 7, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Albert J. Pucciarelli, Partner, McElroy Deutsch Mulvaney & Carpenter , Ridgewood, N.J. Ormend G. Yeilding, Shareholder, Lowndes Drosdick Doster Kantor & Reed, Orlando, Fla. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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I. B RAND M ANAGEMENT A GREEMENTS A ND N EW H OTEL D EVELOPMENTS Ormend G. Yeilding, Esq., Shareholder Hospitality & Leisure Practice Group ormend.yeilding@lowndes-law.com
Brand Management Agreements and New Hotel Developments Issue: • In hotel development deals, lenders will not fund a construction loan until the brand management agreement is in place. But how does a management agreement work with respect to a hotel that does not yet exist? • This issue is resolved in a separate document – either as a stand-alone agreement or as an addendum to the management agreement – that governs the obligations of Manager and Owner between the closing of construction financing and opening of the hotel. This document is usually called a “Technical Services and Pre-Opening Agreement [or Addendum]. ” 6
Brand Management Agreements and New Hotel Developments The Technical Services and Pre-Opening Agreement [or Addendum] or “TSA” As the title implies, the agreement is comprised of two main sections: 1. Technical Services: this section governs the construction phase and details the types of plans and specifications for the new hotel that must be submitted by Owner to Manager for approval, and sets forth the deadlines for construction milestones between Owner and Manager. 2. Pre-Opening – this part of the TSA governs the 6 to 12 months prior to hotel opening, setting forth the actions that Manager will take (at Owner’s expense) to get the Hotel operationally ready for opening, such as hiring staff, pre- selling rooms, etc. 7
Brand Management Agreements and New Hotel Developments Technical Services in More Detail What the Manager Wants in the TSA: • Owner’s obligation to provide submittals to Manager for review for compliance with brand standards at every stage of the hotel design through final construction plans. • Manager to have approval rights over the major project consultants, such as the architect, engineer, general contractor and interior designer. • Owner’s obligation to build the hotel in accordance with the Manager-approved plans on a timely schedule, with deadlines for commencement of construction, substantial completion and opening. • Fee from Owner to compensate Manager for its review of plans. 8
Brand Management Agreements and New Hotel Developments Technical Services in More Detail What the Owner Wants in the TSA: • Specific limit on time to review – such as 15 to 45 days depending upon type of submittal. • Specific Standard of Review – since construction can take from 18 to 36 months, want to “lock down” the specific applicable brand standards in place at the time of the TSA, so that Owner doesn’t have to revise plans to accommodate changing standards. • “One Bite at the Apple” : once Manager has approved plans, the plans are then “deemed” to be in compliance with brand standards (even if they technically are not in compliance). Owner needs to be able to rely on Manager’s approval. 9
Brand Management Agreements and New Hotel Developments Pre-Opening in More Detail What Manager Wants: • Needs notice from Owner as to date that is one year prior to projected opening, so that Manager can begin hiring employees for and marketing the hotel. • Owner funding of all pre-opening expenses, and payment of a pre-opening fee for these services to Manager (otherwise Manager does not begin earning regular management fees until hotel is open and generating revenues). • Manager to have final say when the hotel is authorized to open under the Manager’s brand. 10
Brand Management Agreements and New Hotel Developments Pre-Opening in More Detail What Owner Wants: • All pre-opening expenses to be subject to a budget agreed to by Owner and Manager, and reasonable approval rights over material variances from the budget. • Manager to be subject to a “reasonableness” standard for authorizing hotel opening (punch-list items can be completed after opening). • Clearly defined dispute resolution process – since normal litigation claims are not practical in a construction process, consider establishing a committee of “decision makers” from each of Owner and Manager who are empowered in the TSA to hear disputes about approval of plans, authorizations, etc., on a timely basis. 11
Hotel Management Agreements: Top Ten Topics for 2016 and Beyond – CLE Webinar – April 14, 2016 II. FEES: BALANCING INCENTIVES Albert J. Pucciarelli, Esq., Partner Chairman, Hotel and Resorts Practice Group apucciarelli@mdmc-law.com
REVENUE BASED- - Base Fee – Typical: 3% of Gross Revenue - Marketing Fee – Typical – 1% of Gross Revenue - Negotiable? Maybe a ramp up in early years of a new hotel - For an existing hotel, Owner may seek a fee that is a higher percentage, but only a percentage of Gross Revenue in excess of previously achieved levels; this will be resisted by the big brands Albert J. Pucciarelli, Esq., Partner Chairman, Hotel and Resorts Practice Group 13
INCENTIVE FEE – Rewards not just volume (Gross Revenue) but operating efficiency. Typical: 10% of Gross Operating Profit – i.e., Gross Revenue MINUS Operating Expenses – i.e., just those expenses that are within the control of the Manager and therefore include routine departmental expenses, but do not include the traditional “below -the- line” items: - FF&E Reserve (negotiable) - Capital Expenditures - Property Insurance - Property Taxes - Debt Service - Depreciation - Distributions/Dividends - Owner’s Income Taxes Albert J. Pucciarelli, Esq., Partner Chairman, Hotel and Resorts Practice Group 14
Alternatively, the incentive fee may be a percentage of Income Before Fixed Charges* or Income Before Fixed Charges MINUS the FF&E Reserve or Net Operating Income † or even Net Income . ‡ _____________________________________________________ *Income Before Fixed Charges = Gross Operating Profit MINUS Base Fee. † Net Operating Income = Gross Operating Profit MINUS Base Fee, Insurance Premiums, Property Taxes and Ground Rent. ‡ Net Income = Net Operating Income MINUS Replacement Reserves, Income Taxes and Depreciation. Albert J. Pucciarelli, Esq., Partner Chairman, Hotel and Resorts Practice Group 15
SOME VARIATIONS ON INCENTIVE FEE FORMULAE: • Earned as a percentage of Gross Operating profit but only paid to the extent of Net Operating Income in excess of Owner’s Priority which is typically a percentage of project cost increased by subsequent capital expenditures; Earned but not paid fees accumulate and may or may not bear interest and are paid to the extent of excess NOI after current Incentive Fees are paid. • Or a higher percentage – say 25% - of Net Operating Income (all expenses before the replacement reserves, debt service, depreciation and income taxes). • Or for an existing hotel, a higher percentage, but only of Gross Operating Profit in excess of a previously achieved level. • There are many variations that are the ‘stuff’ of hard negotiation . Albert J. Pucciarelli, Esq., Partner Chairman, Hotel and Resorts Practice Group 16
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